Mortgage Mike’s Daily Rate Commentary

It’s Monday and we’re on cruise control for the most part as there are no economic reports to shake things up. Comments from ECB president Mario Draghi are pressuring European bonds and that seems to be the only catalyst that is spilling over to US bonds as they are in the red as well.

We will see Consumer Confidence and some Case Shiller housing numbers tomorrow, but the main event for the week will be Wednesday’s FOMC rate decision on Wednesday at 12 p.m. MST. This could ignite the next move the markets make, and while we hope that results in lower rates, we must remain objective and face the dominant trend of the last month of rates pushing higher.

Given the probability of rates pushing higher, we will maintain a locking bias.

With no economic reports to move the markets today, stocks and bonds are uneventful. Stocks continue to bask in the glory near their all-time highs, and bonds are hovering at the same level last seen around mid-May of this year; meaning interest rates were at their respective high of the year. While the last 3 days are giving the lower interest rate hopefuls a sign of a potential reversal, it may just be a breather in anticipation of next week’s FOMC meeting which could spark the continual move higher in rates. While we hope for rates to move lower, we can’t ignore the prevailing trend which has been higher. We will maintain a locking bias.

Mortgage interest rates continue to climb higher, as yields in the debt market approach levels not seen since 2011. The seven year high in mortgage interest rates seems to be a long time coming, as the highly anticipated climb finally hits. As we’ve talked about in past market updates, this move was needed to help allow the Fed to continue to push short term interest rates higher without causing the yield curve to invert. If this move in longer term rates continues, the likelihood of the Fed hiking rates for the 4th time in 2018 this December will increase. Odds are currently set at 60% for a December hike, but that will move higher as we see the long end of the yield curve advance.

Stocks are climbing higher again this morning, sending the Dow Jones Industrial Average to new all-time high levels. This is again creating a headwind for mortgage bonds which compete for the same investment dollars as stocks. As tariffs continue to hit the market, we can expect to see consumer prices climb higher. This will add inflationary pressure to the market, which will again push mortgage interest rates higher. Once again, not good news for the mortgage or housing industries.

Mortgage interest rates continue to climb and have now set new multi-year highs. The higher rates are making it more difficult for homebuyers as they rush in to try to avoid the risk of buying when rates are rising. Just as we saw back in 2005, increasing rates initially bring many buyers to the market before the higher rates really become a serious drag on home values. As rates move up, buyers are generally forced into lower home prices or to accept a payment that exceeds their comfort level. Neither of these are positive experiences for the housing market and could lead to trouble down the road. If the slowing trend of new construction continues, that could be a sign of overall weakness developing within the housing market. Remember, the initial signs of a housing crisis were evident in 2005. However, they weren’t acknowledged until a couple years later. There are many similarities between now and 2005. Although it’s hard to say where things will go, it’s responsible to acknowledge the trends and potential impact a couple years down the road.

Despite ongoing threats between the US and China, the stock markets are looking to set new all-time highs. With stocks nearing this critical level, it shows the lack of concern investors truly have over the potential impact of tariffs. President Trump continues to step up his threats against China. However, China appears to be committed to the battle and is not showing signs of backing down. Trumps fear is that China will add tariffs to produce to turn the farming industry against the Republican Party. Although that seems like a long-shot, it will be interesting to see if China makes the move. That will most certainly upset President Trump, which will likely lead to further escalations. With most of the goods being imported from China now being taxed with tariffs, there isn’t much more to add to the basket. The weapon will then likely be to increase the tariffs, which will continue to drive consumer inflation higher here in the US. As you know, that is the worst possible scenario for mortgage interest rates which will drive higher as inflation increases.

Hopefully, any rate needing to be locked has already been secured. We will maintain our locking position.

The downward trading channel continues to drive mortgage interest rates higher. Bond prices opened just above a critical support level and have since fallen beneath. This now will act as a ceiling of resistance for bond prices; which isn’t good news for the near-term direction of mortgage interest rates. With no sign of relief for prices, it seems things will continue to get worse for rates before they get better. With the next floor of support matching where mortgage rates were at multi-year highs, bond prices will hopefully find support at that level. If not, watch for mortgage rates to continue to climb as they reach levels not experienced in many years.

The US deficit continues to grow, as tax cuts lower the revenue created for the federal government to operate. Although it is partially covered by an increase GDP that has created more tax revenue, we can expect the stimulus impact to lesson as consumers and businesses adjust to the new norm as a tax rate. As the deficit moves higher, this will add upward pressure to interest rates as the government is forced to pay higher returns to keep up with the cash demand to maintain Federal expenses. Once again, the year 2020 seems to be a critical point when the downside to the tax cuts will hit the economy. For the first time in many years, we could see stagflation, which is where inflation moves higher as the economy slips into a recession. That is one of the most destructive possibilities for an economy, as it would require the Fed to continue raising rates even as an economy slows.

Mortgage bonds remain trapped in a strong downward trading channel, as mortgage interest rates approach multi-year highs. There is currently a strong floor of support that could help stop the fall. However, it’s too early to say if that will be the case. We first need to see bonds at least move in a sideways trading pattern, as that would move them out of the downward trading channel in which they are currently in. However, we need to assume that the channel will continue and that mortgage interest rates have a good chance of continuing to climb higher as well.

There is very little economic news driving the markets this morning, so trades will be heavily influenced by the technical picture. The biggest news of the day so far comes from Washington, with President Trump set to initiate $200 billion worth of tariffs on China. However, it is only at a rate of 10% compared to the originally scheduled 25%. We will have to see if China retaliates. If they do, we could see an increase in volatility in the stock market.

Given the continued weakness in the bond market, we will maintain our locking bias.

Mortgage bonds have been unable to break out of the downward trading channel that has pushed mortgage interest rates higher in recent days. Once again, bonds are down today in early morning trading and remain close to putting mortgage rates at multi-year high levels. Most experts believe that we will continue to see gains in the US stock market in the months to come, which will continue to pressure mortgage interest rates higher as investors sell their safe bond portfolio to invest in the greater return opportunity of the stock market.

US Retail Sales climbed by less than the market anticipated in the month of August, coming in at just a 0.1% increase. This was well below the 0.4% gain anticipated. However, it is coming off a month that showed a 0.7% growth rate. Therefore, the lower report is still overall very strong. Given that Retail Sales is one of the most powerful forces to impact the US economy, it’s nice to see this number strong. The past two months continue to signal a strong labor market as employers staff to meet consumer demand.

The countdown to Brexit continues to tick, with many uncertain as to how the transition will impact them personally. With opposition against Brexit building, we may see a stronger fight to keep Britain in the EU. If it does happen, the question remains as to whether it will be a hard or a soft exit. Either way has consequences, but a soft Brexit could cause less damage. As far as the impact to mortgage interest rates, remember that the Brexit announcement pushed mortgage rates down to near the lowest rates in history. So talk of Brexit not happening will likely drive rates higher.

Stocks are continuing to push higher, as the upward trend in stock prices continue to move closer to all-time high levels. This technical move has created a headwind for mortgage bonds and has pushed mortgage interest rates up to within striking distance of multi-year high levels, which we will see unless bond prices stabilize soon. I’d like to see bond prices at least form a sideways trading pattern and get off the downward trend in which they are currently trapped.

The Consumer Price Index (CPI) report showed that inflation on the consumer level rose by 0.2% last month, which was below the 0.3% anticipated by the markets. Although this was still a healthy rate of increase, the bond market celebrated the news that it was below what was expected. Further, the annualized year over year rate dropped from 2.9% down to 2.7%, which is a healthy fall and again news that was celebrated by bond investors.

Another financial powerhouse has released their opinion as to when the next financial crisis will hit, and once again it is predicted to be 2020. They expect the downturn to be significant, with the recovery having a bit of a wild card. One major difference between the overall market now vs back in 2008 is that there are far more passive investments these days. Many are just buying into funds that will perform based on the performance of the S&P, for example, vs buying a company’s stock directly. This could add a challenge to the recovery as the lack of investments into direct stocks is something we haven’t faced in prior downturns.

As far as real estate is concerned, it seems to me as if we are in the equivalent of 2005. Everything seems wonderful and there is very little talk of real estate values facing a downturn. Although it’s hard to say how real estate will perform through the next recession, it is something to consider.

With the negative sentiment, the bond market has driven mortgage interest rates near multi-year high levels in recent days. However, bond prices are stable this morning, fueled by a surprisingly low Producer Price Index (PPI) report. Although this report measure inflation on a wholesale level and not on a retail level, the market seems to be appreciating the first drop in PPI that we have seen in a year and a half. Tomorrow we will receive the Consumer Price Index (CPI) report. Since CPI measures inflation on the retail level, it is far more significant to the bond market. The market is still anticipating consumer inflation to fall from an annualized rate of 2.9% down to 2.8%. Although not a significant drop, it will be nice to see the pace of consumer inflation slowing. That will be good news for the bond market, which hates inflation.

Ray Dalit, a highly respected billionaire hedge fund manager, said that the US economy is likely two years from experiencing a downturn. He feels that this will primarily be a currency crisis as compared to the last recession which was a debt crisis. In a currency crisis, the value of the dollar would weaken, essentially increasing the costs of goods and services. Further, importing products from abroad would cost more, adding to the supply challenge. This would improve the value of commodities, which would drive gas prices higher. Overall, not a good environment for the citizens of the US to deal with.

After bouncing off the 25-day moving average yesterday, stocks are continuing their technical run higher once again this morning. We can now expect to see stocks climb up towards the top of the trading channel, which will continue to provide a headwind for the bond market as investors sell bonds to take advantage of the momentum in the stock market. The bad news for the bond market is that there is a coupon roll-over at the end of business today that will technically push bond prices beneath another important floor of support. Once beneath this level, we could see additional losses accumulate as there will be nothing to stop the fall until the next floor; which is well beneath current levels. Rates have already ticked higher this week and it appears that there is more room for rates to move higher before we see them stabilize.

According to the National Federation of Independent Business, Positions Not Able to Fill rose by 1 point from the prior month and remains the “Single Biggest Business Problem” for small companies. Generally, a tight labor force is the primary driver of higher wages, which is a forward indicator of near term inflation. Given that inflation is the arch enemy of mortgage bonds, we expect this to contribute to higher mortgage interest rates in the near term. Until the US economy shows signs of slowing, mortgage rates should continue to climb higher.

Given the weakness in the bond market, we will maintain a locking bias.